US INFLATION FINALLY SEES A SHARP FALL
That was the one signal that the US Fed had been waiting for. In the last few weeks, the Fed had been overly concerned that the inflation was stagnating and the last mile was proving to be very difficult. Finally, there is good news in June, with the consumer inflation falling by 30 bps to 3.0%. This was driven by a sharp fall in the energy inflation, which had been the bane in the last 6 months. Food inflation was slightly higher in the US in June, but to compensate for that, core inflation tapered by another 10 bps, keeping overall inflation in check. The table below captures the break-up of inflation, and this bodes well for PCE.
Inflation Basket
Category |
Jun 2024 (YOY) | May 2024 (YOY) | Inflation Basket
Category |
Jun 2024 (YOY) | May 2024 (YOY) |
Food Inflation | 2.20% | 2.10% | Core Inflation | 3.30% | 3.40% |
Food at home | 1.10% | 1.00% | Commodities less food and energy | -1.80% | -1.70% |
· Cereals and bakery products | 0.50% | 0.70% | · Apparel | 0.80% | 0.80% |
· Meats, poultry, fish, and eggs | 2.60% | 2.40% | · New vehicles | -0.90% | -0.80% |
· Dairy and related products | -0.10% | -1.00% | · Used cars and trucks | -10.10% | -9.30% |
· Fruits and vegetables | -0.50% | 0.60% | · Medical care commodities | 3.10% | 3.10% |
· Non-alcoholic beverages | 1.50% | 1.30% | · Alcoholic beverages | 1.80% | 1.70% |
· Other food at home | 1.60% | 1.00% | · Tobacco / smoking products | 8.20% | 7.80% |
Food away from home | 4.10% | 4.00% | Services less energy services | 5.10% | 5.30% |
· Full service meals and snacks | 3.90% | 3.50% | Shelter | 5.20% | 5.40% |
· Limited service meals | 4.30% | 4.50% | · Rent of primary residence | 5.10% | 5.30% |
Energy Inflation | 1.00% | 3.70% | · Owners’ equivalent rent | 5.40% | 5.70% |
Energy commodities | -2.20% | 2.20% | Medical Care Services | 3.30% | 3.10% |
· Fuel oil | 0.80% | 3.60% | · Physician Services | 0.80% | 1.40% |
· Gasoline (all types) | -2.50% | 2.20% | · Hospital Services | 6.90% | 7.20% |
Energy services | 4.30% | 4.70% | Transport Services | 9.40% | 10.50% |
· Electricity | 4.40% | 5.90% | · Motor vehicle Maintenance | 6.00% | 7.20% |
· Natural gas (piped) | 3.70% | -0.20% | · Motor vehicle insurance | 19.50% | 20.30% |
Headline Consumer Inflation | 3.00% | 3.30% | · Airline Fare | -5.10% | -5.90% |
Data Source: US Bureau of Labour Statistics
What are the key takeaways from the break-up of inflation above?
One can argue that a few swallows do not make a summer. The Fed would most likely also look at July and August Data and then take a view in the September Fed meeting. If the inflation data does not worsen too much from here, the Fed should be on target for its first rate cut in September this year.
RECAP – CME FEDWATCH FOR THE WEEK ENDED JULY 05, 2024
Let us start with a recap of the week to July 05, 2024; and how the CME Fedwatch panned out during the week. By the week to July 05, 2024, the markets had more or less crystallized that the first rate cut would happen by September 2024 and that there was a high probability of two rate cuts by the end of 2024. Her are the CME Fedwatch probabilities.
Fed Meet | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 | 550-575 |
Jul-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 7.8% | 92.2% | Nil |
Sep-24 | Nil | Nil | Nil | Nil | Nil | Nil | 5.9% | 72.0% | 22.1% | Nil |
Nov-24 | Nil | Nil | Nil | Nil | Nil | 2.5% | 33.8% | 50.9% | 12.8% | Nil |
Dec-24 | Nil | Nil | Nil | Nil | 2.0% | 27.3% | 47.3% | 20.8% | 2.7% | Nil |
Jan-25 | Nil | Nil | Nil | 1.4% | 19.3% | 41.0% | 29.1% | 8.3% | 0.8% | Nil |
Mar-25 | Nil | Nil | 1.0% | 14.0% | 34.6% | 32.6% | 14.5% | 3.1% | 0.2% | Nil |
Apr-25 | Nil | 0.5% | 7.4% | 24.2% | 33.6% | 23.6% | 8.8% | 1.7% | 0.1% | Nil |
Jun-25 | 0.3% | 5.0% | 18.4% | 30.4% | 27.1% | 13.9% | 4.1% | 0.7% | Nil | Nil |
Jul-25 | 2.2% | 10.2% | 23.0% | 29.1% | 22.0% | 10.2% | 2.8% | 0.4% | Nil | Nil |
Sep-25 | 10.1% | 20.1% | 27.7% | 23.6% | 12.9% | 4.5% | 1.0% | 0.1% | Nil | Nil |
Data source: CME Fedwatch
The big story of the week was the FOMC minutes published on July 03, 2024; and that only underscored the rather ambivalent approach of the Fed.
Having set the basis for the discourse with the previous week’s data, let us turn to how the triggers for inflation panned out in the week to July 12, 2024; which is the recent week.
CUT TO PRESENT: CME FEDWATCH IN WEEK TO JULY 12, 2024
The latest week to July 12, 2024 saw the CME Fedwatch continue to factor in 2 rate cut in 2024. However, the lower than expected consumer inflation triggered a hope that the Fed rate cuts could be surer, sharper, and also more decisive.
Fed Meet | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 |
Jul-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 6.2% | 93.8% |
Sep-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 6.0% | 90.3% | 3.8% |
Nov-24 | Nil | Nil | Nil | Nil | Nil | Nil | 3.6% | 56.3% | 38.6% | 1.5% |
Dec-24 | Nil | Nil | Nil | Nil | Nil | 3.2% | 50.6% | 40.5% | 5.5% | 0.2% |
Jan-25 | Nil | Nil | Nil | Nil | 2.3% | 37.8% | 43.2% | 14.9% | 1.6% | Nil |
Mar-25 | Nil | Nil | Nil | 1.9% | 30.8% | 42.2% | 20.6% | 4.3% | 0.4% | Nil |
Apr-25 | Nil | Nil | 1.1% | 18.6% | 37.4% | 29.7% | 11.1% | 2.0% | 0.2% | Nil |
Jun-25 | Nil | 0.8% | 13.5% | 31.9% | 31.9% | 16.5% | 4.6% | 0.7% | Nil | Nil |
Jul-25 | 0.3% | 6.5% | 21.8% | 31.9% | 25.0% | 11.2% | 2.9% | 0.4% | Nil | Nil |
Sep-25 | 5.9% | 19.6% | 30.5% | 16.0% | 13.1% | 4.0% | 0.8% | 0.1% | Nil | Nil |
Data source: CME Fedwatch
The biggest trigger in the latest week was the announcement of CPI inflation, and it came in sharply lower by 30 bps. Here are some key data points for the week.
Let us now turn to the all-important aspect of the key triggers for the CME Fedwatch in the coming week; and what could really impact the Fed rate cut probabilities.
TRIGGERS FOR CME FEDWATCH: NEXT WEEK TO JULY 19, 2024
The next week has some important triggers but the focus will be more on specific data flows and the speeches delivered by the Fed governors.
Let us now turn to the final story of how all these flows added up to influencing the CME Fedwatch probabilities in the latest week.
CME FEDWATCH – MORE CONFIDENT OF SEPTEMBER RATE CUT NOW
The CPI inflation falling sharply from 3.3% to 3.0% in the month of June was a big trigger for the Fed to closely consider rate cuts in September. This week we have seen some of the probabilities of rate cuts sharpening in the CME Fedwatch. Here is a quick dekko at how the rate cut probabilities have panned out at the end of the current week.
For now, the Fed can afford to maintain status quo. The question is whether the Fed will bite the bullet and cut rates, if there is tearing urgency for the same. We have to find out!
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